Wednesday, July 31, 2013

On July 30, the
Senate Commerce, Science and Transportation Committee voted to approve the nomination of Tom Wheeler to be Chairman of the FCC.
The nomination was the subject of a June 18 hearing, which came just a few days after the Free State
Foundation's "If
I Were the FCC Chairman"
lunch seminar. Of course, Mr. Wheeler's name
figured into the FSF seminar panelists' discussion of
what they would do if they happened to be the new FCC Chairman.

The FSF seminar panelists offered
some distinct yet insightful perspectives on understanding the dynamics of technological
change, policy imperatives for the new FCC Chairman, and the characteristics
that Mr. Wheeler might bring to the agency. Their views are worth considering
as the nomination process proceeds to the full Senate.

On the seminar panel were Gail
MacKinnon, Executive Vice President and Chief Government Relations Officer,
Time Warner Cable; Craig Silliman, Senior Vice President for Public Policy
& Government Affairs, Verizon Communications; and Gigi B. Sohn, President
& CEO, Public Knowledge. Their exchange, taken from an edited transcript of the event, follows below.

FSF President Randolph May,
moderator for the seminar panel, prefaced the ensuing discussion by pointing to
his May 9 Washington Times op-ed:

MAY: I wrote this piece called "A Historian for the FCC." It basically looked at Tom Wheeler's
avocation as a historian. As you know,
one of his books focused on the role the telegraph played in winning the Civil
War. And essentially I was making a
point that I hope he would look at history and realize we're a long way from
the telegraph and some other things…. So one of the questions I'm going to ask
these panelists later, probably, would be to put on their historian's hat and,
with that in mind, think about the way that they would frame their
administration if they were the chairman.

A bit later on, the panel turned
to the subject of the FCC Chairman nominee:

MAY: I want the panelists briefly to describe what
character traits they think a new chairman should have, what's important for
success for the new chairman in terms of the way he operates the Commission and
the character traits he brings to that.

[W]e know that Tom Wheeler's a historian. That's something that's been an important
part of his life. Is there anything in
terms of the way that you think he should, as a historian, think about the job
and that you would share with us?

The seminar
panelists' responses:

MACKINNON: Being a historian is a real asset, because as one
senior entertainment executive once said to me, "It's the history you
don't know that will kill you."
Tom Wheeler's been around for a long time. He is somebody who knows how business works
and he's a very thoughtful, deliberative human being. I don't know him, personally, but what I've
been told is he's open-minded and collaborative. Those are very essential characteristics for
somebody who is coming over and presiding over the industry, looking at
industry on a daily basis.

SILLIMAN: It would be
presumptuous for me to speculate on how people think about the job and how Tom
Wheeler will do. But the scope of history
is an interesting question for our industry that has a couple of angles.

One is that communications technologies throughout the
scope of history have served an empowering, enabling role, for people to spread
and disseminate ideas, to open up their horizons to people beyond their direct
physical proximity. That spread of ideas
has unleashed a whole round of human innovation, freedom, and other
empowerment. It's tremendously exciting.

The second lesson would be people sitting around ten years
before Gutenberg came up with the printing press, or ten years before the
development of the telegraph. People could no more foresee the technological
changes that would be wrought and the societal changes that would be wrought
ten years hence than we can here today.

We often feel, and rightfully so, that we are at the
cutting edge of technology. And we
are. But we also have to remember that
the cutting edge is constantly moving out ahead of us. We are six years into the smartphone
revolution. 15 to 18 years ago, if you
were an early adopter and you had dial-up Internet and maybe an analog cell
phone, the idea that we could foresee 10 years, 15 years out what may be coming
would be the ultimate hubris. I don't
think we can foresee years out now.

I think that's tremendously exciting, because we are going
to see huge breakthroughs in the areas of energy management, education,
healthcare. A lot more things are going
to be enabled by these communications technologies. But in the policy realm what I would take
from the sweep of history is: don't ever assume that standing in the static
point, where we are today, that we can see out over the horizon 5, 10 years in
an environment that has been characterized by this pace of technological change,
either from the straight technology perspective, or the larger societal
benefits perspective. When you're looking at these issues, don't make the
mistake of locking yourself into today's vision of today's technology. Make sure you have a framework that will
evolve at the same rate as technology.

SOHN: The FCC chair has got to be a leader, and he has to
have an agenda. Within the first 30
days, he needs to get up there and say, "This is what I want to do and
this is why." I've even said this
to Tom Wheeler….

He also needs to pick good people; people that really know
the agency, not his best friends from college or the Supreme Court, or wherever
else; people that care about this stuff and people that know how to run the
agency. As far as a historian is
concerned, he needs to look at the history of broadcasting. He needs to look at the history of cable and
see the consolidation that's taken place.

Broadcasting was first proposed to be a common carrier
service, believe it or not. And Congress
decided to do this public interest obligation thing, which hasn't worked out
all that well. Cable also started out
not that vertically integrated in the 1984 Cable Act. They were allowed to own the programming on
their systems. Both of those were huge
policy mistakes. And the chair needs to
learn that the Internet cannot become the same thing.

The Internet is the most empowering technology we've ever
seen. But if it falls under the control
of just a few hands or some really bad countries, it's not going to be
that. I started out 20-some-odd years
ago trying to make broadcasters and cablecasters obey their public interest
obligations. Having completely totally
failed at that, I look to the Internet as being the solution to the problem of
top-down command-and-control media. And
it's got to stay that way.

For my part, I think it
imperative the FCC Chairman actively takes a free market-oriented approach to
communications policy. It's no secret that the communications industry is critical
to our nation's prosperity. "One-sixth of the American economy can be directly
linked to the industries the FCC regulates," according to Acting FCC
Chairwoman Mignon Clyburn. And due to the ability of information technologies
to offer new capabilities, enhance productivity, and increase efficiency, most
of the remaining five-sixths of the economy can be indirectly linked to the
communications industry. In light of the innovative and competitive conditions
that now prevail concerning communications services, a market-based approach
can better enable additional waves of creative and competitive breakthroughs
than last-century's monopoly-era regulatory approach.

A free
market-oriented approach to communications policy, in short form, includes the
following: (1) recognition that today's rapidly-changing digital communications
market has replaced the last-century, analog-era monopolistic assumptions upon
which most of the FCC's regulatory apparatus is based; (2) seriousness in
pursuing elimination of outdated regulations that can no longer be justified
and that threaten to reduce or block further innovation and investment; (3)
strong preference for technologically neutral policymaking that eschews silo
treatment of different industry segments and recognizes the reality of
intermodal competition between platforms; and (4) heavy presumption against new
regulatory controls over dynamic products and services unless clear evidence of
market failure and consumer harm can be demonstrated.

With his
broad background in communications policy as well as the history of technology,
Mr. Wheeler has all the intellectual tools and experience necessary to pursue a
free-market approach as FCC Chairman. Of course, effectively implementing such
an approach – amidst disputes over how to design spectrum license auctions,
appellate litigation over network neutrality regulations, the ongoing IP
transition, and questions over the future of forbearance and legacy regulations
– involves successfully addressing many practical challenges.

In any event, the viewpoints
offered by the three panelists at FSF's "If I Were Chairman" seminar –
all of whom are nationally prominent in the communications policy realm and
known for their expertise regarding the FCC – were thought-provoking and
stimulating. Worth keeping in mind as Mr. Wheeler's nomination moves toward a
final vote by the Senate.

Tuesday, July 30, 2013

Legislation
in Congress would create a common sense framework for state taxation of
interstate sales of digital goods and services. It would thereby stave off taxation
of the same transactions for digital goods and services by multiple states. Importantly,
the bill would not impose any new
taxes or mandate tax or no-tax decisions by individual states. For the sake of
consumers and the future of the digital economy, let's hope this bill gains
traction in Congress.

S. 1364 –
the "Digital
Goods and Services Tax Fairness Act" – would set sourcing rules for
determining when states have jurisdiction to tax retailers or taxpaying
consumers. Again, this would prohibit multiple states from imposing taxes on
the same transaction.

The bill
would also require states that decide to tax such transactions to clearly make
that determination through legislation.
Taxation of digital goods through state tax department interpretations would be
impermissible.

Finally, S.
1364 would ban discriminatory state taxes on the sale or use of digital
goods or services. That is, it would prohibit the sale or use of digital goods
or services from being specially taxed or taxed at a rate higher than similar
goods or services that are not provided electronically.

Monday, July 29, 2013

For well more than a decade now the jurisdictional line
between interstate and intrastate communications has become increasingly
blurred. As communications have moved from narrowband to broadband networks,
and from analog to digital platforms, with transmissions circumnavigating the
globe in little more than nanoseconds, at times it can become impractical, if
not impossible, to determine whether a transmission is properly classified as
an interstate or intrastate communication. In any event, implementing such
jurisdictional separations can be costly.

Accordingly, for many years I have expressed concerns
regarding the ability of the states, through the exercise of their jurisdiction
over intrastate communications, to impede the development of modern telecom
networks through overzealous regulation. Because intrastate and interstate
communications travel over the same networks, the FCC and the states share
jurisdiction over the same physical plant. So an unnecessarily burdensome,
unduly costly regulatory regime in one jurisdiction may affect the delivery of
telecom services in the other by impacting incentives to invest in upgrading and
building-out networks.

This is truer in today's increasingly "IP world"
than ever before, as more and more traffic transitions from legacy analog
telecom networks to Internet Protocol-based platforms, regardless of the
specific technology employed.

Certainly there are a litany of state actions over the years
that might be cited as cases in which the states' exercise of their jurisdictional
claims have failed to take into account the changing telecom environment and
technological advancements.

But, consistent with Louis Brandeis' observation that the states
may serve as "a laboratory" for experimentation, there are other
instances when states, by their example, have led the way. In some sense,
especially in the last couple of years, this is happening in the communications
arena where many states have adopted deregulatory policies. Indeed, some of the
states are ahead of the FCC in adjusting their regulatory regimes to account
for technological advances and today's competitive marketplace realities.

For instance, more than half the states have adopted
legislation or otherwise acted to restrict state regulation of VoIP services.
This is consistent with the recognition that there is no public interest reason
to subject these IP services to legacy telecom regulation.

And on July 22, the Washington Utilities and Transportation
Commission issued an Order
remarkable for the clarity with which the agency explained its determination to
deregulate legacy wireline services. The order addresses a petition for
regulatory relief filed by Frontier Communications earlier this year. The state
commission determined that:

Frontier faces strong competition
for the majority of [its] services throughout most of that geographic area….[T]his
docket affords the Commission the opportunity to acknowledge the realities of
the 21st Century marketplace by reducing unnecessary regulation and
bolstering the ability of Frontier and its competitors to provide effective
competitive telecommunications services to the ultimate benefit of this state’s
consumers. [Page 2]

I commend the entire decision to you. But for those short on
time, here are a few key excerpts that demonstrate the extent to which the
Washington commission, historically not known for its deregulatory tendencies,
is attuned to the changing communications marketplace.

Wireless, VoIP, and bundled service
options to basic single-line service place competitive pressures on providers
of such basic service. Even if Frontier were the only provider of single line
basic service, should Frontier seek to raise its rates for such service
customers could opt for one of these other service options – in fact, that is
what has been happening. While we understand Staff and Public Counsel’s strong
desire to define services narrowly to protect the interests of those consumers
with the fewest competitive alternatives, we do not believe the legislature
intended the Commission to adopt such a rigorously constricted approach in
assessing competitive conditions. Indeed, the narrow market definition Staff
and Public Counsel propose would undermine legislative intent by virtually
ensuring that Frontier could never demonstrate the existence of effective competition
for these services. [Page 19]

To the extent possible, consumers,
not the Commission, should determine whether other providers’ services are
viable alternatives to the incumbent telephone company’s services. The record
evidence overwhelmingly demonstrates that most consumers consider wireless,
VoIP, and CLEC services, individually and in bundles, to be alternatives to
Frontier’s basic residential or small business services….We would be ignoring
reality if we were to accept Staff and Public Counsel’s definition of the
relevant market as limited to stand-alone, single landline residential and
small business services provided at Frontier’s tariff rates. [Pages 19 - 20]

And, finally, in its Conclusion, the Washington commission
summed up this way:

Our assessment of the merits of
Frontier’s Petition for relief from traditional regulation is guided by the
remarkable transformation in the telecommunications industry that continues to
occur…. If alternative providers of telecommunications services exist and the
Company no longer serves a significant captive customer base, we will
substantially reduce historic regulation, particularly economic regulation, in
favor of the disciplines of an effectively competitive marketplace. In the
world as it exists today, our traditional role must devolve to one increasingly
focused on preserving and promoting conditions for competition. [Page 26]

As I said, in years past the state commissions often have
adopted regulatory postures that had the effect, whether intended or not, of
deterring innovation and investment. Not so with regard to the states that recently
have acted to preclude regulation of VoIP services. And not so with respect to
last week's Washington UTC decision.

And now for the moral of the story: The FCC commissioners
and staff could benefit much from an open-minded reading of the Washington state
commission decision. Put bluntly, the FCC has been too slow to provide
regulatory relief in the face of what the Washington commission called
"the remarkable transformation in the telecommunications industry that
continues to occur." The FCC has been too slow to "substantially
reduce historic regulation, particularly economic regulation, in favor of the
disciplines of an effectively competitive marketplace."

Many examples of the FCC's reticence to "reduce
historic regulation" could be given. Here I will simply point out that, in
rejecting several forbearance requests for regulatory relief, the FCC has
continued its failure to account properly for the obvious competitive impact of
wireless and VoIP services. And, based on its actions thus far, it appears unlikely
the agency will consider in a timely fashion the competitive impact of
over-the-top Internet video services on traditional cable and satellite video
services still shackled by outdated legacy regulations.

So, again, if anyone at the FCC needs a copy of the
Washington state commission's decision for inspiration, please just click here.

Thursday, July 25, 2013

In the
communications context, the word "disconnect" probably brings to mind
what happens when a subscriber stops paying for their telephone or cable video
service. Increasingly, however, the term has come to characterize the FCC's
regulatory policy toward cable and video services.

On July 22, the
FCC released its 15th
Video Competition Report.
Last year's Report confirmed what we
already knew about the video market: namely, that it's innovative and
competitive. The 15th Report
reconfirms those conclusions. An updated swath of data compiled in the 15th Report points – yet again – to the proliferating
video choices enjoyed by consumers.

But by
bolstering the case for the video market's competitiveness, 15th Report data also magnifies the serious
disconnect in the FCC's video policy. Much of the FCC's video regulations are
based on 1990s analog-era monopolistic assumptions about cable
"bottlenecks." Prior to the 15th
Report it was already obvious that last-century rationales for extensive
regulation had been rendered obsolete by innovation and competition in the
video market. The latest data only restates the obvious: the disconnect – like
a broken chain – between 1990s monopolistic assumptions and today's competitive
video market conditions is growing.

According to 2010
numbers contained in the 14th
Report, 98.5% of all
households – that is, 128.8 million households – had access to at least three
multichannel video programming distributors (MVPDs). And 32.5% of households –
42.9 million – had access to at least four MVPDs. The 2011 numbers contained in
the 15th Report show further
improvements: 98.6% – 130.7 million households – had access to at least three
MVPDs, and 35.3% – 46.8 million – had access to at least four.

Market share
data can easily be overemphasized as an indicator of competitiveness, especially
where markets are driven by rapid changes in technology, services, and consumer
behavior. Yet, even in terms of market share, data cited in the 15th Report further further reinforces the video
market's competitiveness. Between year-end 2010 and June 2012, "cable
MVPDs lost market share, falling from 59.3 percent of all MVPD video
subscribers at the end of 2010 to 57.4 percent at the end of 2011, and 55.7
percent at the end of June 2012." Meanwhile, direct broadcast satellite (DBS)
market share increased from 33.1% in 2010, to an estimated 33.6% at the end of
June 2012. And "telco" MVPD entrants served 6.9% of the market in
2010, increasing to 8.4% in 2011.

Also, the 14th Reportcalled attention to the entry and growth of online video distributors (OVDs) as
a potent source of value and competition. Data in the 15th Report further highlights the increasing popularity of OVD
services with consumers:

SNL Kagan
estimated that there were 26.6 million Internet-connected television households
(i.e., accessed via an Internet-enabled game console, OVD set-top box,
television set, or Blu-ray player), representing 22.8 percent of all television
households, at the end of 2011, and estimated that by the end of 2012, the
number would grow to 41.6 million, or 35.4 percent of television households.

Of
course, traditional TV viewing far outweighs online video viewing. A cited
study by Nielsen found that in the second quarter of 2012 Americans watched an
average of nearly 32 hours per week of traditional TV and 2.5 hours of
time-shifted TV, but watched approximately 4.5 hours per week of video using
the Internet. Nonetheless, "SNL Kagan reports that the availability of
large libraries of archival content and the availability of new content,
coupled with the availability of broadband and an increasing number of
Internet-connected devices, has enabled OVD substitution."

Further, the 14th Report acknowledged the ongoing
replacement of analog systems with digital, rapid expansion of high-definition
broadcasting and TV ownership, multi-casting, digital video recorder (DVR) options,
video-on-demand functions, as well as TV-Everywhere and other mobility
capabilities. The 15th Report reveals
across-the-board increases in deployment, functionality, and adoption of such
advanced video technologies. For instance, as of 2012, more than 74% of
households have sets capable of receiving digital signals, including HD
signals. Nearly 44% of households have DVRs. More than 5% of MVPD subscribers
qualifying for TV-Everywhere access used it to view content in the month of
September 2012. By year's end 2012, more than half the geographic footprints of
the top eight cable operators had transitioned to all-digital video.

Of course, the 15th Report nowhere admits the
effectively competitive state of the video market. While the statute doesn't
expressly require any "effective competition" conclusion, such
non-responsiveness to the evidence seems counterintuitive. Perhaps the FCC
avoids any such conclusion out of fear it could be used in court to challenge
any number of FCC legacy cable regulations.

Still, one can
reach an "effective competition" conclusion through an admittedly
abbreviated analysis supplied by the FCC itself. Consider today's nationwide
market for video subscription services in light of the FCC's "competing
provider test" for determining whether a local franchise area is
effectively competitive. According to the test, effective competition exists if
at least two unaffiliated MVPDs offer comparable video services to half of the
area's households and the number of households subscribing to service other
than the largest MVPD exceeds 15%.

Now recall that
98.6%, or 130.7 million households, had access to at least three MVPDs. Plus, 59.3%
of households subscribe to cable, 33.6% subscribe to one of two DBS providers
offering service nationwide, and 8.4% subscribe to a "telco" MVPD
service. The nationwide MVPD market would pass the "competing provider
test" for effective competition with flying colors. At the very least, it
cuts cable bottleneck assumptions to pieces.

Ultimately, the
underlying premises for video regulation need to be completely reexamined by
Congress. The legacy cable and satellite
video regulatory apparatus needs to be dismantled. And First Amendment concerns
with government regulation of video service providers' editorial and speech
activities need to be respected. A market power framework that considers
anticompetitive conduct and consumer harm could supply the analytical basis for
a more targeted approach that reflects actual marketplace conditions.

A First
Amendment-friendly, market-power approach to video regulation was recently sketched
out by D.C. Circuit Judge Brett Kavanaugh in Comcast
v. FCC (2013). At
issue was an FCC order requiring Comcast to carry the Tennis Channel on a
particular cable channel tier, pursuant to a statutory provision regarding program
carriage agreements (Section 616). "In restricting the editorial
discretion of video programming distributors," wrote Judge Kavanaugh in
his concurring opinion, "the FCC cannot continue to implement a regulatory
model premised on a 1990s snapshot of the cable market." Over the last
sixteen years, Judge Kavanaugh explained, "the video programming market
has changed dramatically, especially with the rapid growth of satellite and
Internet providers," the result being that "neither Comcast nor any
other video programming distributor possesses market power in the national
video programming market." Judge Kavanaugh therefore concluded that
"[u]nder the constitutional avoidance canon, those serious constitutional
questions require we construe Section 616 to apply only when a video
programming distributor possesses market power."

Until Congress
replaces the legacy regulatory system, we face the unfortunate prospect of a
still further disconnect between "a 1990s snapshot of the cable
market" and actual competitive video market conditions. Expect future Video Competition Reports detailing
innovative video services, competing business models, and changing consumer
habits. And, absent a course change by the FCC, expect the agency, even in the
face of abundant dynamic market indicators and pro-consumer data points, to
continue avoiding the obvious about today's effectively competitive video
market.